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State Motor Fuels Tax is Set to Rise by Nearly Four Cents in January

The North Carolina Motor Fuels Tax (the state gas tax) is expected to go from 35 cents per gallon to 38.9 cents per gallon at the beginning of 2012 if no action is taken by the General Assembly, according to staff at the legislature and the Department of Transportation.

The state Department of Revenue sets the gas tax rate every six months. It uses a legislatively-created formula of 17.5 cents as a base plus seven percent of the average price per gallon of wholesale gasoline and diesel fuel. The rate rose from 32.5 cents to 35 cents in July. The Department of Revenue will announce the new rate December 15.

North Carolina is now ranked as having the ninth highest state gas tax in the country. It would move up to eighth with a rate of 38.9 cents per gallon, just behind Indiana’s rate of 39.7 cents. The highest state gas tax is in Connecticut at 49.6 cents per gallon.

As noted in a previous Civitas Institute article, there was at one time a cap on the Motor Fuels Tax of 29.9 cents per gallon but that was allowed to expire in 2009. Instead of extending the cap, lawmakers instead converted the cap into a floor, ensuring the tax couldn’t go lower than 29.9 cents per gallon. In short, as the gas tax rises to 38.9 cents in the new year, it will be 30 percent higher than it would have been if lawmakers had extended the cap.

Budget writers in the General Assembly estimated the gas tax could go as high as 37.5 cents per gallon during the 2011-12 fiscal year and 39.7 for 2012-13. The Fiscal Research Division at the General Assembly estimates each additional penny on the gas tax costs taxpayers about $50 million. So a tax rate of 38.9 cents would actually cause revenues to fall short of projections by about $27.5 million in the second year of the budget.

The Division of Motor Fuels Tax in the Revenue Department collects about $1.6 billion each year from the gas tax. The division then sends 75 percent of the revenue to the Highway Fund for road projects and 25 percent to the Highway Trust Fund.

Republicans in the state House of Representatives approved a bill during special session November 28 to cap the tax at 35 cents but the Senate had adjourned until the next special session February 16. By then, of course, the gas tax will already have risen. Lawmakers could still take some action at that time.

It’s a good bet their opponents would try to put their own spin on any decision. They could say Republicans raised taxes by doing nothing. Opponents could also claim the GOP killed road projects and jobs by capping the tax.